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Treasury Yields Near 14-Month High on Bets Fed Will Cut Buying

Treasuries due in a decade or more are at their cheapest level since July 2011, relative to their global peers with comparable maturities.

Treasury 10-year yields approached a 14-month high before data this week forecast to show employers stepped up hiring, adding to signs of economic recovery and boosting speculation the Federal Reserve will reduce stimulus.

U.S. companies added more workers last month, ADP Research Institute will say tomorrow, according to a Bloomberg survey of economists. The Labor Department will report on June 7 that nonfarm payrolls rose by 167,000 positions and the jobless rate held at a four-year low, a separate survey showed. Investors in Treasuries bet for a seventh straight week prices of the securities will fall, a JPMorgan Chase & Co. survey showed.

“The employment number will shape near-term expectations and determine the near-term path of interest rates,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “If we get a number over 200,000, that would lead to speculation the Fed could taper purchases as early as September. Realistically though, you need several months of that.”

The U.S. 10-year note yield rose one basis point, or 0.01 percentage point, to 2.13 percent at 1:23 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security due in May 2023 declined 1/8, or $1.25 per $1,000 face amount, to 96 18/32.

The benchmark yield climbed to 2.23 percent on May 29, the highest since April 2012, after reaching a 2013 low of 1.61 percent on May 1. The average yield for the past 10 years is 3.58 percent.

Volatility in the Treasuries market as measured by the Bank of America Merrill Lynch MOVE index closed at 79.23 yesterday in New York after reaching 81.22 on May 29, the highest level in almost a year. It fell to a record 48.87 on May 9.

Treasuries due in a decade or more are at the cheapest level relative to global peers with comparable maturities since July 2011, according to Bank of America Merrill Lynch indexes. Yields on Treasuries were 60 basis points higher than those in an index of other sovereign debt for the two trading days ending yesterday, the cheapest level since July 31, 2011.

Investors in Treasuries maintained bets the prices of the securities will drop, according to a survey by JPMorgan. The proportion of net shorts was at 21 percentage points in the week ended yesterday, according to JPMorgan. The figure is down from 23 percentage points in the previous week.

The percent of outright longs, or bets prices will rise, was at 11 percent, while outright shorts slipped to 32 percent from 36 percent, the survey reported.

Atlanta Fed President Dennis Lockhart said yesterday that while he wouldn’t rule out a reduction of asset purchases in the next few months, recent data suggest the economy remains too weak to justify a reduction.

An industry report yesterday showed U.S. manufacturing shrank in May at the fastest pace in four years. The Institute for Supply Management’s factory index fell to 49, the lowest reading since June 2009, from the prior month’s 50.7.

John Williams, chief of the San Francisco Fed, said the purchase program may end this year. Lockhart and Williams don’t vote on the central bank’s policy-setting committee this year.

The Fed buys $85 billion of government and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs. It purchased $3.33 billion today in Treasuries maturing from May 2021 to February 2023.

‘Desperate’ Attempt

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the central bank’s zero-bound interest-rate policy and quantitative-easing programs are becoming more of a problem for an economy that needs structural reforms.

The Fed’s polices are “desperately attempting to cure an economy that requires structural, as opposed to monetary, solutions,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today.

In a posting today on Twitter, Gross said, “30 years of bond bull markets have raised returns and spirits. Now there are doubts. We’re sticking with bonds as long as Fed does.”

The U.S. central bank has held its target interest rate at zero to 0.25 percent since December 2008. A Fed advisory panel of bankers said last month it expects record accommodation to last from one to three years.

U.S. companies added 165,000 workers in May, after hiring 119,000 in April, ADP Research Institute will say tomorrow, according to a Bloomberg survey.

The Labor Department will report on June 7 that the unemployment rate held at 7.5 percent last month and the increase in nonfarm payrolls surpassed April’s 165,000 jobs, a separate Bloomberg survey showed.

The Fed’s measure of traders’ forecasts for inflation for the period from 2018 to 2023, known as the five-year, five-year forward break-even rate, was 2.63 percent as of May 30, the latest figure available. That was the lowest in six months and compares with the average of 2.75 percent for the past decade.

The yield premium investors demand to own 30-year bonds instead of 10-year notes traded at almost a six-month low. It was 1.16 percentage points, after touching 1.12 percentage points May 29, the least since Nov. 23. The premium, which rose to 1.23 percentage points on May 22, has averaged 1.2 this year.

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